Legacy Project

An Issue of Trust

Fri, 23 Sep 2022 21:32:06 GMT

Bonus Content:

Every morning at 4, Jim and Greg Moes meet in their office at their dairy’s new milking center to plan the day’s activities. It’s quieter then, before feed wagons and skid steers and milk trucks roar through the operation.

The brothers were both born in 1953, only 11 months apart. While they can be strong-willed and opinionated with outsiders, they’re in near perfect unison on their goals for their families, employees and business.

They’re so close that they can—and usually do—finish each other’s sentences. “We need to get a transition plan in place; we need an endgate for us,” Jim says. “And we need to plan for the next generation,” Greg adds.

Their situation is an ideal case study for the Farm Journal Legacy Project. The project, sponsored by Pioneer Hi-Bred, is working with three farm families that are transitioning their operations.

The Moes’ case is complicated by the fact that they manage three separate business entities:

MoDak Dairy, a 1,400-cow operation, milks three times a day and raises all replacements.

MoDak Feeds manages some 3,000 acres of cropland for the dairy operation.

MoDak Trucking provides trucking services for the dairy and, up until the MoDak dairy expansion in 2008, provided total mixed rations to neighboring dairies.

Jim and Greg have nine siblings—six sisters and three brothers—all of whom are heirs to part of the operation’s land base. None are active in the business. And all but one live within an hour of the Moes’ century-plus farm on the outskirts of tiny Kranzburg, S.D., a dozen miles east of Watertown.

The family is close-knit and gets together for holidays. At Thanksgiving, they each sit in the same spot around the table as they did when they were kids. But as Jim and Greg start the work of passing the farm to the next generation, things are getting complicated. And they fear the transition could blow up the family, the operation, or maybe both.

“We grow all of our forages, so we have a little better control on our feed costs,” Greg says. “But that’s why we need the land base kept together to grow feed and get rid of the manure,” Jim immediately adds.

Here’s why transition planning is so complicated for Jim and Greg. Their mother, Eileen, owns several quarters of the land they operate.

Another huge chunk of land is in a family trust, with other siblings named as heirs to specific quarters.

The problem is that the acres in the trust have different values because of varying soil type and because some is cropland, some is in pasture. Jim and Greg fear that when their mother passes on, this could cause trouble. There have already been rumblings from some siblings that they want their money as soon as possible.

Buying their siblings out in one fell swoop would be a challenge for Jim and Greg. Financing that, along with their $10 million dairy facility, would stretch cash flow to the breaking point. Even now, with dairy prices hovering near break-even, the operation is in survival mode. “Every $1/cwt. swing in milk price equals $320,000/year in cash flow,” Greg says.

Their estate planners’ only suggestion was to buy life insurance. But each year, as Eileen, Jim and Greg age, the premiums become more cost-prohibitive.

The land issue aside, Jim and Greg want to set up a transition plan that allows the fifth generation of Moes to take ownership. They have several longtime employees that they want to bring into ownership as well.

Lack of a clear transition plan was the reason, at least in part, that Jim’s daughter Nichol and her husband, Eric, left the operation a year ago. They had come back two years before that to help manage the new dairy, which has grown from a few hundred cows to its current 1,400. Jim also has two sons who have worked on and off at the dairy. Neither are currently involved.

Greg and his wife, Julie, who serves as chief bookkeeper and paymaster, have three children. Their youngest son, Scott, came back to the farm three years ago to work as herd manager. His older brother, Jake, came back last year to manage the double-20 parlor (expandable to a double-30). Greg and Julie’s oldest child, Janet, lives in North Carolina with her husband, Matt, and their baby daughter.

And then there’s Lee Tol, the son of Jim’s wife, Cathy, by another marriage. Lee, a trained mechanic, has worked with Jim on the cropping side of the operation for two years.

The long-term employees that will be part of the transition plan are Jeremiah Pederson (six years), who manages Mo-Dak Trucking; Joe Turbes (23 years), the Moes’ main cattle feeder; and Blaine TeKrony (20 years), who is the assistant crop manager and works with Jim.

“Our employees built this operation alongside us, and they deserve a share in ownership,” Jim says. “Without them, we would not have grown as we have,” Greg adds.

The Moes’ situation is typical of multigeneration farms trying to create a succession plan. “The Moes have tried to engage in the succession planning process,” says Kevin Spafford, Farm Journal’s succession planning expert. “But the effort loses steam due to the complexity of the
endeavor, the lack of competent professional assistance and confusion caused by not using a defined process.”

Their situation is a bit atypical as well. “There’s a lack of communication about succession, no clearly defined objectives and only a vague idea of how the next generation should get involved,” Spafford says.

“In my workshops, people are often surprised that we don’t discuss trusts, wills, the estate tax and buy-sell agreements,” he says. “Instead, we talk about communication, family dynamics, leadership development and creating a bigger opportunity.

“These soft issues are much more difficult to learn, but without confronting the emotional stuff, we won’t achieve lasting change.”

Let the work begin.

ABOUT THE FARM JOURNAL LEGACY PROJECT

One after another, readers have reached out to say “thank you” since we launched the Farm Journal Legacy Project in 2008. That’s because the self-reliant qualities that make farmers the strong backbone of our food supply also make it difficult for them to turn over the management reins to the next generation.

The Farm Journal Legacy Project is a catalyst for the process to begin and is devoted to cultivating multigenerational success. A key part of that is providing producers with the tools to simplify the complex and daunting process of succession planning.

A grant from Pioneer Hi-Bred, a DuPont business, will make planning easier for farmers as agriculture takes on the largest transfer of wealth in history.

Even though 80% of farms plan to transfer control to the next generation, only 20% are fully confident in their succession plan. The startling distance between those numbers is at the heart of what motivates Farm Journal and Pioneer to take bold steps to close the gap. The Pioneer grant helps make the following efforts possible:

Extensive editorial coverage of succession planning throughout Farm Journal Media—in Farm Journal, Top Producer and Dairy Today magazines, on the “AgDay” and “U.S. Farm Report” TV shows and on www.agweb.com .

An online library of practical succession planning tools and resources you can use at the Legacy Project Web site, www.farmjournallegacyproject.com .

A monthly “Leave a Legacy” TV show on the “AgDay” national network.

Hands-on workshops led by Kevin Spafford, Farm Journal succession planning expert.

A Legacy Project workbook to help guide and organize your analysis, planning and succession steps.

A free weekly eNewsletter to help inspire and guide your operation’s succession planning moves. To sign up, go to www.farmjournallegacyproject.com .

—Charlene Finck, Editor, Farm Journal

Are You Ready for Family Governance?

Fri, 20 Nov 2020 05:52:50 GMT

Set clear expectations and accountability

Do you have a hard time keeping off-farm family members informed about the farm? Do you have a retired farm own-er who still wants to manage day-to-day operations? Are you becoming overwhelmed by the magnitude of the business decisions you have to make?

If any of these questions hit home, it might be time to think about family governance. Put simply, family governance is a structure to educate and aid communication between family members. For farms undergoing a leadership transition, this is especially important, says Rena Striegel, president of Transition Point Business Advisors.

Identify Your Goals

A family governance board can include a handful of family and non-family members who meet regularly. These boards can fill various roles related to the business.

“Take the time and clearly define what it is you want these people to do for you, so they know where the bounda-ries are,” Striegel says. “Otherwise you end up with people thinking they are empowered.”

Align Stakeholders

Answer a key question when forming a board, says Davon Cook, co-founder of Ag Progress. Are you asking for feedback or is the meeting just informational?

For some farms today, the owners might not be the managers. Or spouses or off-farm heirs have a financial or emotional stake in the farm but aren’t employed by it.

“The job of the board is to keep what owners want in sync with what managers do,” Cook says.

If you are in the early stages of creating family governance, understand the process can be overwhelming. “Start practical and make sure everyone understands the purpose,” Cook explains. “Remember, progress over perfection is huge.”

How To Develop Family Governance

Regardless of your farm size or sophistication, family governance can offer peace of mind for farm leaders, says Rena Striegel of Transition Point Business Advisors. She suggests taking these steps:

Define the goal of your family governance board. Will the board develop policies and procedures for the farm? What information needs to be shared with whom?

Develop a policy manual. Clearly describe each person’s role on the board.

Choose your board members. You’ll likely have family members, however non-family members can create profes-sionalism and accountability.

Plan to meet about three times per year. Set an agenda and determine follow-up communication and next steps.

Reading Recommendation

If you want to learn more about how family governance can improve your business, Davon Cook of Ag Progress has a book suggestion. “ The Balance Point: New Ways Business Owners Can Use Boards ” by Cary Tutelman can serve as a guide to tackle business transition obstacles in times of economic insecurity.

Don’t delay in creating or updating your succession plan. Join leading experts at the Legacy Project Conference, Jan. 28 in Chicago. Register at TPSummit.com

New Mexico State University Collaborates on $9.75 Million Grant to Study Bovine Respiratory Disease

Fri, 20 Nov 2020 05:33:37 GMT

CLOVIS, N.M., June 8 -- New Mexico State University issued the following news release:

New Mexico State University is partnering with Texas A&M and other universities across the country on a $9.75 million grant from the U.S. Department of Agriculture’s National Institute of Food and Agriculture to research bovine respiratory disease and how to reduce its prevalence in beef and dairy cattle.

NMSU’s Southern Great Plains Dairy Consortium, a Cooperative Extension Service program in Clovis aimed at ensuring long-term sustainability of New Mexico’s dairy industry, will play a key role in making this research a success.

“NMSU got involved in this research because of the consortium and we can use this resource as a wraparound tool for this grant,” said Robert Hagevoort, an Extension dairy specialist. “The consortium is a multi-state, multi-university, multi-disciplinary entity. We already have the tools in place for the teaching and extension side of this grant. By combining these with the research aspect of the grant, we are maximizing and leveraging the available resources that might not otherwise be available to NMSU or its students.”

Milton Thomas, professor of animal and range sciences, and Tim Ross, department head of animal and range sciences, are co-principal investigators on the research.

Bovine respiratory disease is recognized as one of the leading causes of death in beef and dairy cattle, resulting in significant economic loss for farmers and ranchers, Hagevoort said. Typically, it is the calves that are affected by the disease.

“We have good medication to treat the disease, " Hagevoort said, “but we don’t know if there is a subsequent effect that could influence their performance down the road after they are cured and go on to live their lives.”,” he said.

Researchers plan on finding 500 affected and 500 healthy dairy heifers in New Mexico and monitoring them from birth to calving and their first lactation. Hagevoort said there are indications that the disease could be genetic. Through this research, they will try to identify genetic markers for cattle that might be predisposed to the disease.

The data will be used to develop diagnostic tests and genetic selection tools to identify animals that are resistant to the disease. Animal welfare will also be assessed.

Scientists will already have contacts with dairies in New Mexico that are participating in the consortium that may be willing to participate in the project.

On the teaching side of the consortium, students from participating universities attend a six-week summer program that gives them hands-on experience learning large herd dairy management.

Hagevoort said the consortium’s goals fit right in with what is being accomplished through the grant.

“We are already talking about the bovine respiratory disease through the consortium,” Hagevoort said. “Now, we can pass along the information we find through this research and make that an emphasis of what we teach.”

Scientists from the University of California-Davis, Colorado State University, the University of Missouri, Washington State University and the U.S. Department of Agriculture’s Agricultural Research Service are also studying BRD in their respective regions through this grant.

Sons Continue Family Tradition in Dairy Industry

Fri, 20 Nov 2020 02:59:13 GMT

By: Kaitlin Cordes, Effingham Daily News via AP

Joe Probst has been recognized as one of the most valuable and productive dairy farmers in Illinois over the course of his 43 years in the industry.

In November, Probst received the Dairy Industry Service Award from the Illinois Milk Producers’ Association, which recognized Probst’s distinguished service to the state’s dairy industry.

Although Probst is now “retired,” he still helps out with the dairy farm. He also plants crops.

“I still drive the tractor, run the combine and do the planting,” Probst said.

Now, the dairy farm is a family affair for the Probst clan. His sons Phil and Toby are co-owners and operate Probstland Dairy, located about three miles north of Wheeler. Probst remains part owner of the operation. The area where they live and farm is truly “Probstland” — Probst and his wife, Inis, his two sons and their families and a nephew live within minutes of each other.

Dairy farming has been a lifelong career for Probst, who grew up just a half a mile north of his current homestead on E. 1500th Avenue.

“I’ve dairyed all my life,” Probst said. “My brother and I milked together, and when we divided the heard, he got 12 (cows) and I got 11.”

Probst started dairy farming on his own in 1954, a year after starting up his dairy business with his brother.

The operation, which produces milk for Prairie Farms, has grown to over 300 milk cows today.

Probst had served on the Prairie Farms Board of Directors for 43 years and traveled to Springfield for monthly board meetings up until his retirement.

Probst’s retirement has not stopped him from involving himself in educating others about the industry either.

Probst and his wife host field trips for first- and second-graders from Jasper, Clark and Cumberland counties. Students tour the farm and milking facilities, learning about the cows and the ins and outs of the dairy industry from Probst.

Probst recently took agricultural education instructor Lindsey Vogt and her group of future agricultural teachers on a tour of the dairy farm so the group could earn college credits.

Probst has also hosted the Holstein Picnic and several barn meetings.

These type of services earned the Probsts the 2012 Illinois Stewardship Farm Family of the Year award at the Illinois State Fair Agriculture Day.

Probst has been a member of several dairy associations throughout his career, including the American Dairy Association of Illinois. He’s been the El Paso Illinois director of Midwest Dairy, the St. Louis District Dairy Council director, and Prairie State Select Sires Breeding Corporation director.

The Midwest Dairy Association reports that Illinois is the 22nd largest milk-producing state in the United States, and dairy farms yielded 215 million gallons of milk in 2014.

Dairy farming in Illinois generates approximately $389 million in milk sales annually.

How to Construct a Succession Plan

Fri, 20 Nov 2020 02:58:58 GMT

It’s not as simple as handing the family farm to the oldest son

Handing over the reins to the family farm can be a difficult process, but the ultimate goal of most families is to pass on the farm to the next generation. Unfortunately, the majority of farms don’t make it to the third generation. At the first-ever Farm Journal Legacy Conference in Kansas City, Mo., Dick Wittman, an Idaho farmer and president of Wittman Consulting, provided an outline for a succession plan.

“I can tell you from first-hand experience my family has experienced nine transition events in the last 35 years,” Wittman says.

Bonus Content

“Outside of agriculture it is a process we see every day, but we are running a family farm business in agriculture, too.”
—Dick Wittman

Maybe the vision for the farm is to provide financial security and value for the family, but position it for maximum value when exiting at the end of a successful work career. Organizational structure should also be determined to help describe where the farm currently stands and how it will look down the road.

“The question that needs to be answered from the succession planning standpoint is who should be on the bus?” Wittman says. “Should every family member who may be a potential successor be part of that group? Maybe, maybe not.”

It is important to identify those heirs who share a common set of values and commitment to moving the business forward. Then, gracefully invite people who won’t be part of the future off the bus.

“Once you know who should be on the bus, how do we determine what roles they should have?” Wittman asks. Each heir’s role and responsibilities will also need to be determined.

“Outside of agriculture, it is a process we see every day, but we are running a family farm business in
agriculture, too.”

A board of directors, or owner board function, should be part of the organizational structure. It will often include stakeholders active in the operation. The board of directors will determine policy, management direction, owners’ return on equity and financial control.

A CEO will correspondingly need to be determined for the family farm business, but they will answer to the board. “The board of directors are the ultimate authority in the business,” Wittman says.
Defining career paths is also important. It needs to be apparent who is responsible for each task. The path could look something like a general laborer as a teenager, assistant manager after college and CEO later in life.

Deciding who will succeed as CEO is also critical. Typically, succession has been as simple as handing the business over to the oldest son.

The path to succession doesn’t have to be that way.

“They don’t have to be the oldest. They don’t have to be male,” Wittman says. “It needs to be someone who understands what the job of management is and what the attributes are that we are looking for.”

Legacy Project: We Need a Young Guy

Fri, 20 Nov 2020 02:50:49 GMT

Why putting faith in an untested, non-family, suburban “kid” paid off for New York’s Fa Ba Farms

John Knopf is proud of his dairy’s prosperous, three-generation family heritage. But when his children chose not to farm and his expanding business begged for more manpower, he took a chance on young Bob DiCarlo.

“What he knew about farming, he learned in a classroom,” Knopf says. “But Bob was smart. He was a hard worker, and he really wanted to learn. Now he’s learning how to run a business in the ‘arena.’ It’s a lot tougher.”

What enticed DiCarlo to Fa Ba Farms was Knopf’s clear vision for growth. DiCarlo worked there intermittently during college at Cobleskill State University of New York and Cornell University. He had explored opportunities at a variety of other dairy operations as well—some four to five times the size of Fa Ba Farm.

I realized I could be part of building something here,” he says.

That was 2006, and Knopf was a little fried. He had spent the 90s and the first few years of the new millennium transforming a 60-cow tie stall to a 250-head freestall operation. The investment, sacrifice and endless hours took a toll.

“Dad and I were partners, and we were not all that unsuccessful with the transition,” Knopf says, “But I was in my 40s—too old to generate the ‘expansion energy’ you need. Those years about cooked me.”

Knopf knew he needed a young guy on his team.

So, with pockets stuffed full of risk and faith, Knopf, 53, and DiCarlo, 30, got started.

What they agreed on was pace. “We were building efficiencies, scale and capacity for cows first, but it was not going to be a sprint,” Knopf says. They milked for years in a flat barn before erecting a parlor. Bunk silo walls were way down the “to do” list.

“There was always a plan in place, moving us forward slowly,” DiCarlo adds. “It was unwritten, but we talked about it all the time and knew it was the reason we were working so hard.”

Where they differ is style. Knopf thinks fast, talks fast, his office a landscape of high-rise paper piles. DiCarlo is a more reflective thinker, master of the details, setting goals and creating protocols to constantly monitor progress in the herd.

“We are opposite types,” Knopf says. “But time is such a great teacher, and I think we are both evolving.”

Conflict and disagreement are necessary, they say, or new ideas would lack the polish brought on by the friction of debate.

DiCarlo earned his partner’s stripes four years ago. At 10%, he’s a minority owner, but “becoming a partner is a pretty big thing in itself,” he says.

Knopf made it clear from the start that an equity holding could become a reality. DiCarlo would achieve that goal solely on his merit—unlike family members who, Knopf says, are often “anointed.”

So the young man faced and crossed the proving ground, a humbling gauntlet of decisions, actions, wins and losses—all in the name of “getting some experience.”

Their legal partnership agreement dictates yearly profits are split by ownership. DiCarlo earns a certain percentage more—a “kicker”—to reflect his efforts. This, and the profit splits, can be adjusted over time.

“Bob is compensated more for his labor since he’s basically handling all the operational aspects of the dairy now, and I still carry more of the risk,” Knopf explains.

Fearful of jinxing what they’ve worked so hard to achieve, DiCarlo and Knopf say “So far, so good.” Right now, it feels like a success.

“I’m satisfied with Bob’s progress,” Knopf says. “His capabilities are way beyond mine when I was that age.” Further, Knopf says DiCarlo’s role in their 500-cow, 800-acre business has significantly improved his life.

“For the first time, I’m freed up to attend classes like The Executive Program for Agricultural Producers (TEPAP) and serve on the Farm Credit board. I believe participating in these off-farm things brings some residual value to the business,” he says.

Knopf concentrates his energies on outside duties and fieldwork at the farm now, responsibilities he truly enjoys. He’s also trying to learn how to be a better coach for DiCarlo.

“He’s better at that than when I first came,” DiCarlo says. “Maybe it’s because he’s no longer overwhelmed by all the day-to-day stuff on the dairy.”

DiCarlo says he would like to learn to speak his mind more often, as well as become a better people manager. “Cows I have figured out. People—not so much,” he says with a wry smile.

While the transfer of ownership from John’s dad was relatively simple, the next turn over will be much different. “I fully expect to discount (values) when I sell out,” Knopf says. “I don’t want to rob the next generation.”

The partnership is a great way to respect the legacy of a family farm when there are no more relatives to run it, Knopf says. And it’s a good way for a young person to get started. “I wouldn’t hesitate to do it all again,” he says.

Growing Success and Keeping Family First

Fri, 20 Nov 2020 02:47:44 GMT

The Rovey family in Glendale, Ariz. is a prime example of, determined people who took a tough situation and made the best of it. In Episode 18 of “Leave a Legacy TV,” Clinton Griffiths visits the Arizona dairy farm to learn how the Roveys encourage the next generation to cultivate success.

For generations this family has been involved in the Arizona dairy industry.

“I took over the farm from my father when I got out of college back in 1978 and we were milking 200 cows at that time and we’ve built it to 2,000 cows today,” says Paul Rovey, the family patriarch.

From 200 cows to 2,000 cows, mostly jersey and a few brown Swiss, the dairy has continued to grow and expand. Sheep live on the farm along with some big horn Watusi cattle.

The operation’s success is founded on family. Four out of Paul’s five kids live and work on the farm.

“The key is family, keeping family first,” Debra Rovey, Paul’s wife, says. “Those ties run deep and that way you can get through the adversities that come along.”

The next generation intends to continue to farm and the Roveys value their ability to offer livelihood to their children.

“In this day and age, it is hard to start up from nothing, so we feel fortunate that we have the ability to pass it on,” Debra says.

The plan is for the dairy to stay in a trust for all of Paul and Debra’s children. In addition, Paul plans to help each child pursue the area of agriculture they are most interested in. He realizes that they might not all want to dairy forever.

“There is a world of opportunity out there wherever you want to focus, let’s do that,” Paul tells his children.

Overcoming Urban Sprawl

During the time the dairy began and even up until the Paul took over the dairy in 1978, it was located in the country. Town was a distance away and they never thought about losing land to urbanization.

“Back in those days [his childhood] it was way out in the country, it was a trip to go to the city and now the city has encompassed us,” Paul says.

Today that is not the case. The family realizes they won’t be able to farm only grandpa’s land forever so they are buying additional properties in other places.

“We’ve been through some very tough times and realized we’re in a very volatile environment,” Paul says.

For that reason the family is making the most of every opportunity and not limiting themselves to the family homestead.

To learn about how the Rovey children feel their parents prepared them for success, watch the entire episode:

Legacy Project: Keep Key Employees

Fri, 20 Nov 2020 02:43:21 GMT

Protect them like any other major asset

Every dairy of any size has employees so critical to the operation that their loss—through voluntary departure, injury or death—could severely hamper or even cripple the operation.

“Without these key employees, your other assets (cows, facilities, land) don’t mean a thing,” says Matthew Garrow, a Maumee, Ohio, certified financial planner with Engler, Garrow & Roth Ltd.

Bonus Content

Link to seminar

Key Financial Strategies for Today’s Farming Operation

The first level of protection is adequate, affordable health insurance and worker’s compensation. This will assure employees that you are looking out for their best interest, and they will be protected financially while recovering from a health event or accident.

You might also want to purchase disability income insurance that pays both the employee and your business while the employee recovers.

Disability income insurance pays when the employee is injured away from work and can provide needed cash flow during recovery. It might allow you to hire extra help or expertise during the employee’s absence, Garrow says.

Life insurance should be considered for the same reasons. It can financially protect the employee’s family in the event of death, and it can protect your business while searching for a replacement.

Retention of key employees is also critical since competing dairies recognize an outstanding herdsman when they see one. The obvious retention tools are a competitive base salary, 401k retirement accounts and a year-end bonus program.

The less obvious retention tools are pension plans, non-qualified ‘pure deferral plans’ and personal retirement income plans:

Pension plans have the advantage of being a deductible expense for your business in the year of contribution. The employee isn’t taxed on pension benefits until he or she receives it.

But pension plans are risky for employers because they must ensure benefits are paid when due. “You may have to fund a pension plan out of existing cash flow if pension funds don’t keep pace,” Garrow says.

Non-qualified ‘pure deferral’ plans allow employees to defer income into a retirement account tax-free, like a 401k account. Taxes are due at withdrawal. However, employers have fiduciary responsibility for these accounts and must ensure the funds are safe and available when the employee chooses to withdraw.

These plans come with substantial risk for employees as well, since a business’ creditors can gain access to them during bankruptcy, Garrow adds.

The personal retirement income plans are funded by the employer but owned by the employee. They are usually funded by buying whole lifeinsurance policies, with the accumulated cash value of the policies tax deferred and available prior to age 591⁄2.

Employer bonuses usually pay for these policies. The employees must pay taxes on these bonuses, but they get the distribution tax-free later on.

Slow but Sure

Fri, 20 Nov 2020 02:32:08 GMT

Brothers finalize buy-sell agreements.

Nothing moves at warp speed when you’re dealing with intricate, often emotional, contracts between family farm partners. But Greg and Jim Moes are making steady progress updating the buy-sell agreement for their 1,800-cow MoDak Dairy and land they hold in partnership.

The Goodwin, S.D., brothers are part of Farm Journal’s Legacy Project, which helps farmers transition their business to the succeeding generation. Before they can do that, the Moeses have to get their business plans updated.

The previous agreement required each brother to buy out the other’s interest within 60 days of death or exit from the business. That’s an incredibly short time, says Josh Sylvester, Certified Financial Planner and a Legacy Project team member. Simply getting a death certificate can take a month, and then it takes even more time to execute a life insurance claim. The new agreements stipulate closings within six months of a “triggering event” such as death, divorce, legal separation or insolvency.

Bonus Content:
More on buy-sell agreements

A buy-sell review

To simplify things, the Moeses’ attorney, Tom Linngren, drew up separate agreements for the land and the dairy.

In the land agreement, Greg and Jim agree not to sell, assign or encumber their interest to anyone without first obtaining the consent of their brother. The exception is that they can sell or assign their land interest to a spouse, lineal descendant or trust established for a spouse or lineal descendants.

The other key component is determination of value. The agreement says value shall be fixed annually or more often by unanimous consent of Greg and Jim. If more than two years pass without an update, either party can get an independent appraisal.

Payment for the land will be amortized over 10 years in the event of the death of one of the brothers. A 20-year payout was agreed to for all other triggering events. Interest is set at 1% over prime rate.

For MoDak Dairy, each brother owns half the shares. The agreement stipulates that if one partner leaves, the last share of stock will be transferred to the remaining brother for $1. That will allow the remaining brother to have majority voting control if the other brother transfers his stock to family members.

If one of the brothers is no longer actively involved in the business (defined as “devoting as least 40 hours per week to the operations”) and does not sell stock to his spouse or lineal descendants, that will trigger a sale to the remaining brother.

Value of the stock is set at 75% of book value based on the last quarterly balance sheet of the corporation. Buyouts are based on a 10-year payout.

The agreements are fail-safe mechanisms, Linngren says. “Five years down the road, they can agree to ignore these agreements if they want to transfer ownership in some other way. But if one does and one doesn’t, these agreements will be the rule.”

Moes Find Holes in Legacy Plans

Fri, 20 Nov 2020 02:26:58 GMT

After months of document collection and analysis, Greg, Julie, Jim and Kathy Moes were finally able to sit down with their Legacy Project advisers in April to start sifting through options. They met with succession planning expert Kevin Spafford, who leads Farm Journal’s Legacy Project, and team member Josh Sylvester. What their advisers found shocked the Moeses.

Bonus Content

“There were a lot of surprises when Kevin and Josh went through our existing agreements,” says Greg Moes. “We almost put the operation in worse jeopardy through the use of some of
these agreements.”

In fact, within a week of their meeting, Greg and Jim were on a conference call with Sylvester to get suggestions on how to quickly amend some of the paperwork.

The Moeses milk 1,400 cows and farm more than 2,000 acres in Goodwin, S.D., and hope to pass on the operation to the next generation. The objective of the April meeting was twofold:

To shore up existing agreements between Greg and Jim to ensure the current operation will survive should one of the brothers leave or die.
To begin to look at what needs to be done to ensure that the next generation of Moeses can transition into management and eventually ownership roles.

The current documents were drawn up 20 years ago, when land values were much less and transition to the third generation was not as big a priority.

So land buy/sell agreements, stock transfer agreements within the Subchapter S Corporation and cash-based compensation agreements all must be rethought or redrafted to allow transfers between existing partners and to the next generation to begin.

“When the agreements were drawn up back in the ’90s, they were cookie-cutter agreements that worked for a lot of farm operations and other businesses,” Greg says. “But there were not as many dollars involved as today.

It’s scary because the agreements don’t even come close to meeting our needs today,” he says.

The first objective is to shore up existing agreements. Spafford and Sylvester identified several areas of concern should Greg or Jim leave the operation, become incapacitated or die.

For example, Greg and Jim have buy/sell agreements on land that is jointly held. The agreements state that upon the death of one of the brothers, his interest will be offered for sale to the surviving brother, with the closing to take place within 30 days.

The value of each acre of land is also set within the buy/sell agreement. Land inflation could make that set price unacceptable to the Internal Revenue Service for estate tax purposes. It could result in the IRS demanding taxes be paid on value that is never realized by the estate. And it could possibly even force the sale of the land to pay those taxes.

“This mandatory purchase obligation could prevent ownership from transferring to heirs upon the death of a brother,” Spafford says. “Plus, the 30-day obligation to complete the transaction may be unreasonable. It makes more sense to have a 90- or 180-day time frame.”

A Subchapter S Corporation owns MoDak Dairy, with Greg and Jim as principal stockholders. Neither spouse is listed as a stockholder, yet both are signatories to the loans that financed the facility. This could be problematic in the event of a divorce or death, Spafford says.

A buy/sell agreement for the dairy also sets the terms of sale should a stockholder die. Those terms require a 25% down payment, with the balance to be paid over three years.

“Will the corporation have enough cash to fund the down payment and enough free cash flow to service a debt obligation of the installment note payable over three years?” Sylvester asks. “It makes sense to revise the installment term to five, seven or 10 years.”

Another area of concern is the land leases that sustain the cropping operation. Greg and Jim own about 1,000 acres of land that feed the dairy, and lease the land back to the dairy operation. “These ‘controlled’ lease agreements are at less than fair market value,” Sylvester says. This could create a false economy that affects cash flow and operational growth.

In addition, MoDak Dairy leases 320 acres from a land trust established by Gerald Moes, Greg and Jim’s deceased father, and 540 acres from their mother, Eileen, age 82.

Both leases are renewed annually. That could be problematic if Greg and Jim’s siblings want to cash out should Eileen pass away. Spafford and Sylvester recommend that leases run at least three years or longer. To ensure fair rental rates, some type of inflation adjuster should also be included.

Eileen, who was present at the April meeting, seems amenable to longer leases. Susan Beaudry, Greg and Jim’s sister and one of two land trustees, was also in attendance. Though not opposed to longer lease terms, she needs to consult with another sister who is a co-trustee before changing any agreements.

Top 11 Myths of Succession Planning

Fri, 20 Nov 2020 02:55:43 GMT

What you think you know about succession planning, or heard at the coffee shop, might—or might not be—true.

Before moving down any one path, consult a team of knowledgeable, licensed experts, advises
David Repp, an attorney with Dickinson Mackaman Tyler & Hagen, P.C., Des Moines, Iowa, who specializes in taxation and succession planning.

Following are 11 common myths people often accept as truth.

1 I have to treat all my children equally. “There is no shame in admitting that the primary estate planning goal is to carry on the family farm,” Repp says. This may mean that the heir that stays home to farm may get additional farm assets so that the farming operation can be sustained.

The on-farm heir should always receive the farm operating assets. Non-farm assets can be distributed to off-farm heirs to equalize inheritance. However, the bulk of most balance sheets contain farmland.
If farm parents are uncomfortable giving all the farmland to the on-farm heir, they still have options to keep the farm intact but share its benefits for all their children. The first is to grant the on-farm heir an option to farm all the farmland in the estate. This allows the on-farm heir to cash rent the farmland.

The problem with this method is the laws of many states limit how long a “right to farm” can last. In Iowa, it is 20 years. In Minnesota, it is 21 years; Michigan, 12 years; Wisconsin, 15 years.
A better method is to put the farmland into a limited liability company and give shares of the LLC to all the children in the percentages desired. The on-farm heir can be entrenched with lifetime control of the LLC including the right to farm the land.

2 I want each of my children to receive a parcel of land. First, divisions of land can rarely, if ever, be equal, Repp says. Such divisions usually break up the farm rather than continue it.
Second, people forget to update their wills after subsequent sales, purchases and mortgages of farmland. “This may cause unintended consequences—one heir may inherit all the debt,” he says.

3 Life estates are simple and sensible. “Neither life tenant nor remainder holder can sell or mortgage the property without the consent of the other,” Repp says. So life estates can set up conflict. They can also create tax problems because there is no step up in basis when the life tenant dies.

4 Revocable trusts save taxes. “Revocable trusts offer no tax benefits, are costly to set up, need constant attention and are subject to post-death, probate-like administration,” Repp says. “Eighty percent fail to accomplish their stated objectives of avoiding probate.” Nevertheless, if a person’s life expectancy is short, he adds, a revocable trust may be a good tool to facilitate the transfer of assets to intended beneficiaries. They may also be useful for vacation homes in other states in order to avoid ancillary probate.

5 Beware of PODs, TODs and joint tenancy agreements. Payable on death (POD) and transfer on death (TOD) agreements can create inequities among heirs. Joint tenancy agreements can trigger gift taxes if they exceed limits.

6 Beware of Powers of Attorney. “Having power of attorney shifts the burden of proof in undue influence cases to the power holder,” Repp says. So power holders should be very careful when receiving gifts from mom and dad while acting as power holder for them. If there is any uncertainty about mom and dad’s mental capacity, a power holder should not accept any of their assets.

7 Avoid conspiracy theories. “Distant, off-farm heirs often assume undue influence when none may exist,” Repp says. “Parents should reach out to non-farm heirs regularly and share estate plans, even though it might be uncomfortable.”

8 Estate planning should be used as a Medicaid planning tool. “Medicaid is a safety net not to be abused,” says Repp, “and children do not have an inalienable right to inheritance.”

9 Sometimes Medicade planning is appropriate. Repp says when one spouse remains at home, when a disabled dependent exists or when a child is taking care of mom or dad are all cases when planning to set aside assets or dollars is warranted. In these cases, long-term care insurance should be considered so that assets do not have to be sold.

10 The farm will have to be sold for estate taxes. With today’s higher federal estate tax exemptions and built-in protections, no farm should ever have to be sold to pay taxes. In fact, Professor Neil Harl, Iowa State University estate tax expert, says he knows of no farm that has ever had to be sold to pay estate taxes.

11 Letting the tax dog wag the tail. Farmers will go to great lengths to avoid income taxes, which usually means buying expensive equipment just for the deduction. On the other hand, too little succession planning is done, Repp says.

Leave A Legacy Program Features Top Dairies

Fri, 20 Nov 2020 02:17:30 GMT

Today’s special presentation of Leave A Legacy on AgDay TV features two of the country’s most progressive dairies—the first from California, the second from Wisconsin.

The Leave A Legacy series, part of Farm Journal’s Legacy Project , focuses on family farm operations which need and want succession planning to so the operation can be pass on viable, thriving businesses for future generations.

Today’s first segment features Richard Clauss, one of the founders Hilmar Cheese, in Hilmar, Calif. Hilmar now operates the largest single-site cheese manufacturing facility in the world. Richard and his three daughters also milk more than 3,500 Jerseys just down the road from the cheese plant. But the Clauss family, recognizing California’s challenging business climate for dairies, is hedging its bets on Texas as the next best dairy site.

Josh Sylvester, a business specialist with Legacy By Design, discusses the steps in a successful succession plan. Often, these plans require numerous experts and years to develop, and are only successful when all involved family members openly communicate their needs and desires to make the plan work.

Later in the program, Leave a Legacy interviews Jim Ostrom, who with two partners, operate three dairies and milk in excess of 15,000 cows in Wisconsin. Ostrom discusses how he and his partners are growing their business, and the mistakes they’ve made along the way.

To watch the program on-line, click here and go to the May 20, 2010 program.

Trusteed IRAs: why they are popular, who should consider them, what benefits they offer

Fri, 23 Sep 2022 20:01:45 GMT

Q: I’ve heard a lot about trusteed IRAs. How do they differ from traditional IRAs?

A: Simply put, trusteed IRAs offer potential tax benefits of traditional or Roth IRAs with the protection and control of a trust. They provide tax advantages that stretch into the future and offer the ability to control how, when and in what amounts assets are distributed. Trusteed IRAs have become more popular given some of the inherent limits of traditional IRAs and the growing prevalence of self-directed retirement accounts combined with the decline of pension plans. They also are more cost-effective than setting up a trust and are generally more compliant with tax laws.

Q: Who should consider a trusteed IRA?

A: There are several reasons why someone should consider a trusteed IRA, the most consequential of which is if an owner has an interest in controlling assets and realizing tax benefits beyond their lifetime. This can mean an owner is concerned with the financial discipline or sophistication of heirs.

Other reasons include if an owner remarries and wants to provide for a current spouse as well as children from a previous relationship and/or is concerned about IRA management in the event of incapacitation.

Q: I’m in the middle of estate planning. How can a trusteed IRA help with the process?

A: They can help process if only to preserve the potential tax-advantaged accumulation of IRA benefits to pass on to heirs. Under traditional or custodial IRAs, a beneficiary is required to withdraw at least the Required Minimum Distribution (RMD) each year. However, a beneficiary may withdraw additional amounts, for any reason, at any time—and incur possible fees or tax penalties.

Additionally, owners can restrict payouts to a beneficiary to the RMD, enabling it to operate as a spendthrift trust. At the owner’s death, the trusteed IRA would be automatically split into separate accounts for individual beneficiaries, with distribution terms defined for each account.

Another benefit is that estate plans don’t need to be rewritten or updated; trusteed IRAs can be added independent of an estate plan to protect IRA assets which legally pass outside of wills.

Q: Is a trusteed IRA better suited to farmers or owners of farm assets?

A: Not expressly, but a trusteed IRA can play an important role in legacy planning and preservation of farm assets over multiple generations. Given the growing generation gap among farming families, trusteed IRAs could be a way help preserve farm family values over generations from beyond the grave. Moreover, as farm economics continues to change, farmers may find value in the highly customizable nature of trusteed IRAs. In the event of a divorce in the family, for example, assets can be made to not leave the family’s bloodlines.

Q: Are there any downsides to trusteed IRAs?

A: Given that a trusteed IRA requires a corporate trustee, it’s harder to change ownership and family members cannot be named as trustees. Not all financial institutions offer trusteed IRAs so they may not be widely available to interested clients. Additionally, while they offer greater customization and more control, trusteed IRAs carry some limits. To have the highest level of customization and control, a trust would need to be created.

Please send questions, comments or requests to address a topic or issue to Rees Mason at rees.mason@ml.com.

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“Outside of agriculture it is a process we see every day, but we are running a family farm business in agriculture, too.”
—Dick Wittman